Breaking up is hard to do; partnership gets tricky when you\'re asked to leave

December 22, 2010

Breaking up is hard to do; partnership gets tricky when you’re asked to leave

Wednesday, 22nd December 2010

A recent Employment Tribunal case clarifies the status of fixed share partners in law firms

When is a partner not a partner? That was the question posed to the Employment Appeal Tribunal (EAT) in the recent case of Tiffin v Lester Aldridge. It has long been accepted that employees can be given the title of partner without this affecting their status as salaried employees. Less clear is whether a partner who lacks some of the typical characteristics of a full equity partner may claim the reverse: that is to say, that he is in reality an employee.

The question of the employment status of a partner is important because an employee has statutory rights enabling him to bring a claim for unfair dismissal whereas a partner does not. The partnership claims equivalent to unfair dismissal are, if available at all, so difficult and costly to bring that such cases are rare. The result is that junior partners who generally lack some of the rights enjoyed by full equity partners are often required to leave in circumstances which would constitute unfair dismissal if they were employees, but without any realistic prospect for legal redress.

In the case of Tiffin, the aggrieved partner was a "fixed share partner". Unlike full equity partners, who normally receive a percentage of the firm's profits, he was entitled to a fixed amount of the firm’s profits each year, much like a salary, with only a small percentage share on top. As is typical of junior partners, Mr Tiffin had a very limited say in the management of the firm. On being required to leave, Mr Tiffin sought a ruling that he should be classed as an employee, with the employment rights that accompany that status.

Against the factors indicating that Mr Tiffin's true status was that of an employee, there were a raft of factors which suggested that he was a partner. These included the fact that he freely agreed to become a partner and never asserted he was an employee prior to bringing proceedings, that he contributed some capital to the business, was entitled to a small variable profit share, would have received some of the surplus proceeds on a winding up of the firm and was entitled to vote at partners' meetings (albeit with a mere 5 per cent of the votes of a full equity partner).

The EAT's decision was that, on balance, Mr Tiffin was a partner. He possessed enough of the characteristics of a partner and those characteristics need not be satisfied as to any minimum threshold.

Many partnerships and LLP's will consider this judgment with relief. They would have been concerned to find that fixed share partners with similar characteristics to Mr Tiffin are in fact employees for employment rights purposes. What might such a judgment have done to their self-employed tax status as partners, which is hugely beneficial to the firm?

By contrast, the EAT's decision provides no comfort for junior partners. As the law stands, partners can do little when they are required to retire, unless they are "fortunate" enough to be so required by reason of a characteristic protected under discrimination law. That there is no general right of protection against removal without cause for partners reflects the origins of partnerships as a relationship between equals, but can seem anomalous in a world where junior partners are, in reality, not in an equal bargaining position with the full equity partners. In many firms they are treated much as employees would be and, had it not been for the favourable tax treatment that comes with partner status, would probably have remained as employees.

Tina Williams and Daniel Sutherland are partnership law experts at Fox Williams LLP